Great Depression in The United Kingdom - Background

Background

The Great Depression of 1929-32 broke out at a time when the United Kingdom was still far from having recovered from the effects of the First World War. Economist Lee Ohanain showed that economic output fell by 25% between 1918 and 1921 and did not recover until the end of the Great Depression, arguing that the United Kingdom suffered a twenty-year great depression beginning in 1918. Relative to the rest of the world, economic output declined mildly in the UK between 1929 and 1934.

A major cause of financial instability, which preceded and accompanied the Great Depression, was the debt that many European countries had accumulated to pay for their involvement in the First World War. This debt destabilised many European economies as they tried to rebuild during the 1920s.

Britain had largely avoided this trap by financing their war effort largely through sales of foreign assets. Britain had a net loss of £300 million of foreign investments, less than two years' investment on a pre-1914 average. The largest material loss during the war was in the British Merchant Navy, which lost 40 percent of its merchant fleet to the U-boat attacks (but this was replaced soon after the war). Along with loss of assets through enemy action, such divestiture reduced British investments abroad by around 20% by 1918.

The resulting loss of foreign exchange earnings left the British economy more dependent upon exports, and more vulnerable to any downturn in world markets. But the war had permanently eroded Britain's trading position in world markets through disruptions to trade and losses of shipping. Overseas customers for British produce had been lost, especially for traditional exports such as textiles, steel and coal.

Heavy industries which formed the bedrock of Britain's export trade (such as coalmining, shipbuilding and steel) were heavily concentrated in certain areas of Britain, such as northern England, South Wales and central Scotland, while the newer industries were heavily concentrated in southern and central England. British industrial output during the 1920s ran at about 80-100%, and exports at about 80% of their pre-war levels, so there was little chance of Britain being able to amass enough capital to restore her overseas investment position.